Dr Denny Kalyalya is the current Bank of Zambia Governor and the immediate past chairperson of the Association of African Central Banks (AACB). He is on a second mission, having previously served as Governor from 2015 to 2020. He was re-appointed in September 2021. This reflects his extensive grasp of the intricate workings of Zambia’s financial sector as well as the challenges of central banking in Africa.
For good measure, Dr. Kalyalya discusses these issues with the ease and aplomb of one with a broad swath of experience in global finance. Early in his career, he served as a Special Appointee at the International Monetary Fund (IMF) and later as Executive Director at the World Bank Group’s Africa Group 1 Constituency. It is worth mentioning that he started out as a University of Massachusetts/Amherst-trained academic who was Head of Department of Economics and Assistant Dean of Postgraduate Studies, School of Humanities and Social Studies, at the University of Zambia, his alma mater.
In this exclusive discourse with the editorial echelon of Banking & Finance in Africa, he lays bare the strategies the country’s apex financial regulatory authority has been employing to fulfil its mandate of price and financial system stability while assisting the government to maintain growth and sustainable development.
What is the thrust of the Bank of Zambia’s monetary policy?
Our monetary policy’s thrust has been properly defined under the new Bank of Zambia Act, Number 5 of 2022. Although we have had a Bank of Zambia Act since 1996, the new Act was only enacted in 2022. The new Act defines the Bank’s focus, which is maintaining price and financial system stability to foster sustainable and inclusive economic development. These are the Bank’s two primary objectives. Nevertheless, in case of conflict, price stability always takes precedence over financial stability.
Why is it so?
The reason for this is that price stability is considered much more important. Although we often focus on financial stability, price stability should come first because if it isn’t done correctly, financial stability will suffer. Price stability impacts everyone, particularly those with fixed incomes, making it a critical concern. For this reason, we prioritize price stability. However, we consider both price and financial stability when determining monetary policy, carefully balancing the two.
Are there circumstances where price stability conflicts with financial stability?
Yes, such circumstances do arise. In the grand scheme of things, these objectives actually complement each other in a number of ways, but in general, the financial system needs to be stable for monetary policy to effectively work its way through to stabilize prices.
Could you provide one?
For example, if we raise the policy rate by a significant margin, it could actually put some banks under pressure. The increase in the policy rate could result in the repricing of some loan facilities and consequently difficulties in servicing such obligations. This could result in a deterioration in the asset quality and adversely impact capital. Therefore, before making the final decision, we do evaluate the impact. The result may lead us to moderate the extent to which we tighten monetary policy.
What are the guiding principles of your monetary policy?
Let me just stress that we have a forward-looking monetary policy framework. We do this over a horizon of eight quarters, which is two years. So, we assess our current situation and make projections for inflation over the next eight quarters. While doing so, we also examine the risks underlying that forecast. We then inform the public about our observations. We highlight the risk factors that can push inflation up if left unaddressed. That way, it serves as a signal to the general public and economic agents, in particular, that we may decide to tighten or loosen monetary policy depending on how these risks play out. When we first started using this forward-looking framework, some people were worried because it appeared like we were going into other people’s turfs, but we allayed their fears by explaining that a myriad of factors impact price stability.
Are these eight quarters in two years’ framework part of the reforms you introduced?
Yes, it is part of the reforms that we initiated in 2012. We started this process at that time. This was informed by the changing structure of our economy. Before, we relied more on monetary aggregates, but with the advent of digital finance and mobile money, the economy is changing. Therefore, worrying about primary liquidity was no longer a true reflection of what was happening in the economy.
What are the achievements of the Bank’s 2020-2023 strategic plan, and how has the institution built on it?
This period was very significant in our lives, as 2020 marked the height of the COVID-19 pandemic. The newly enacted Bank of Zambia Act is undoubtedly one of the plan’s major achievements. For the first time in the history of the country and the Bank, we actually have a Monetary Policy Committee (MPC) that is established by statute. The Financial Stability Committee (FSC) is another committee of similar rank established by statute. The main difference between the two is that the Monetary Policy Committee is pretty much in-house, although we do have three external members. The Financial Stability Committee, however, brings together all the financial sector regulators. We have two other regulators: the Pensions and Insurance Authority, which regulates and supervises the pensions and insurance industry; and the Securities and Exchange Commission, which deals with the capital markets. So, the three institutions were brought together, plus the Ministry of Finance and National Planning representative of the Secretary to the Treasury. We also have some external partners who give us genuine feedback. When the Financial Stability Committee determines that there is a problem that threatens stability, it will issue a policy directive for the Bank to implement. Both the MPC and the FSC are independent committees that do not receive any directives from the Board. The Board is distinct from the committees. The committees make decisions independently, and their committees are expected to act independently. That is one clear deliverable. To that end, we recently published the Monetary Policy Report for our monetary policy deliberations and the Financial Stability Report for financial stability issues. Furthermore, accountability has increased in the institution to the extent that we have to make ourselves available to Parliament every so often. Indeed, under the former and current Acts, we are required to present our audited financial accounts to Parliament within 120 days of the end of each year. That is transparency and accountability.
Are there other similar initiatives?
We also implemented a new framework for tracking export proceeds. Prior to 1991 when the new administration took over, we had a one-party state. While we had a multiparty state at independence in 1964, the country transitioned to a one-party system of government in 1973. However, in 1990, the constitution was amended to restore a multiparty state. What was more important for the economic side was the prevalence of exchange controls, which had resulted in significant shortages of goods, notably essential commodities. So, when the new administration took office in 1991, one of the first things it did was to eliminate exchange controls. We have stuck with that arrangement to date. Simply put, Zambia has sustained a regime of no exchange controls for 33 years. However, we discovered along the way that we had lost some of our information gathering levers. Each time we tried to ask economic agents to submit information, they would immediately inquire whether we were reintroducing what we had previously discarded. So, this year, after engagement with stakeholders, we introduced the Electronic Balance of Payments (e-BOP) and Export Proceeds Tracking Framework. This means that all exporters are required to receive and record their exports with a local bank. So, effective January 1st, this year, all exporters are required to comply. This means that when they export, we need to know the size of the revenues. They are free to use the money anyway they see fit, but we require records in order to provide accurate balance of payments information. We believe this is a significant adjustment that we have implemented in collaboration with the Zambia Revenue Authority.
Are all these things you have mentioned part of the 2024–2027 Strategic Plan or the 2022–2023 Plan?
There are many aspects of the plan that we have carried over, but the bulk of the work began on January 1, 2024. We also upgraded the real-time gross settlement (RTGS) system last year. This is intended to improve payment systems. In addition, we updated the central securities depository (CSD). As readers may be aware, the central bank serves as a fiscal agent of the government, issuing government securities on its behalf. This role entails that the Central Bank has a government securities.
depository. As previously stated, there are three regulatory institutions. One of them is the Securities and Exchange Commission. It has a depository for stock exchange traders. However, the two systems should be communicating. So last year, we upgraded the CSD. In addition, the significance of the RTGS upgrade is that we are now on track to meet the ISO 20022 Standard for Electronic Data Interchange (EDI). What this means is that for domestic transactions, we have expanded the space where you must enter information on anti-money laundering and other issues. So, when making transfers, you should be more explicit about what the money is for. This is for documentation. We are also working towards cross-border deals. That one is scheduled for November of next year. Right now, if you are making international transfers, you are limited to 35 characters, but we want to be able to thoroughly describe the remittances.
What is your investor portal all about?
Yes, we also developed an investor platform. Previously, participants in government securities auctions were required to go through banks. We discovered that some people found it restrictive, both in terms of time and money, because banks charged commissions. So, we created this platform where organizations and individuals can directly bid and register in the central securities depository. I recall that in 2020, we had about 975 participants who were small players, or what we term the retail category. However, by 2023, this number had risen to 6,359. As a result, many individuals, particularly those from the Diaspora, are becoming interested, and we believe it is the appropriate direction to take. Moreover, we strive to keep pace with technological advancements, as many people believe that regulators are slow to adjust while players are nimbler and faster. So, in 2021, we introduced what we term the Regulatory Sandbox. Consider it analogous to children playing with sand in a box to learn about all of its qualities before progressing to real-world construction. Before completely launching novel ideas, we test them in controlled conditions to ensure that we understand the related risks.
Do you believe that is a good idea for the economy or the financial sector?
It should be beneficial to both the economy and the financial sector, but particularly the latter, primarily for fintechs. That’s where we discovered it to be very relevant. In the payment system, we have a straight-through payment. When you push a payment, it must go through, which is why central bank money comes in. It is not reversible; once the pay button is pressed, you cannot recall that message because doing so will create problems. Consider what happens when you are driving along the highway and suddenly you halt or wish to reverse. You are going to cause some serious problems. Therefore, the same principle applies there. Previously, when you wrote a cheque, it was based on the pull principle, meaning money only moved when someone received it. But now, when you pay with this, you are pushing money through. This is what we did to shorten the time and lessen the “float.” When we first started, the banks were concerned that they did not have enough float because it was not like a cheque.
The Bank recently launched the 2024-2027 Strategic Plan with the theme ‘Promoting Inclusive and Sustainable Development in a Digitalized World.’ Could you provide more insight on the plan?
It is a new plan we launched this year. From the theme of the previous plan, we added “in a digitalized world.” The aim being to further our digitalization drive. Digitalization has made an impact on our financial system, but we want to raise it to a higher level. The plan focuses on four key areas: price stability, financial stability, financial inclusion, and organizational resilience and growth. These priority areas are intended to address the significant problems and opportunities in our operational environment.
As the economy recovers from the negative impacts of the COVID-19 pandemic, new challenges have emerged. These include the effects of climate change, cyber threats, ongoing geopolitical tensions, and the debt overhang. These challenges threaten the financial sector and sustained economic growth. In this dynamic and complex environment, the Bank has developed a strategic plan that will guide it towards stable prices and financial system stability, as well as enhanced financial inclusion. In terms of price stability, we decided that, as part of our unwavering commitment to achieving and maintaining price stability, we would deepen the interbank money market to enhance the transmission mechanism of monetary policy and our data collection capabilities. In the area of financial stability, we believe that a robust financial system is the lifeline of a healthy economy. To promote financial stability, we will strengthen our supervisory framework by, among other things, entrenching regulatory frameworks for environmental, social, and governance practices, improving cyber risk management, and adopting modern technologies. With respect to financial inclusion, we believe that every citizen deserves access to affordable financial services. We will champion financial inclusion and increase access to finance for underserved and unserved communities. The Bank will also leverage technology to increase financial system safety and efficiency. Regards to our fourth area of focus, organizational resilience and growth, the Bank acknowledges that our people are our most valuable asset, and therefore we will strengthen our human capital management and champion an organizational culture based on our values. By the end of the plan period, we expect to have achieved significant progress in providing financial services to the unbanked and underbanked segments of the population, with a particular focus on women, youth, and micro, small and medium enterprises. We will also embed sustainability considerations in the pursuit of the Bank’s mandate and leverage ICT and digitalization to achieve these goals.
What is the essential difference between this new plan and that of 2020-2023?
In the previous plan for 2020-2023, we focused on two areas: financial inclusion and financial stability. We believe that we have made some progress in those areas, but it remains an unfinished business, necessitating continuity in the new plan. We have carried over financial stability and financial inclusion, to which we have added price stability and organizational resilience. The reason is that we still need to work on the monetary policy transmission mechanism. We have observed some challenges. When we send a signal, it does not land exactly where we want it to. So that is our primary objective in terms of price stability. Under financial stability, we have included the subject of ESG, which stands for Environmental, Social, and Governance arrangements designed to address a variety of challenges. That is why we include sustainable development in our plan because we feel that unless we properly manage the environment, everything we do would be unsustainable. We now insist that regulated institutions adhere to the principles we champion. Furthermore, we are improving data collection management. We are establishing a more encompassing data warehouse so that we can use big data analytics since we collect a lot of information as part of our operations. When we use AI, for instance, we should be able to make better use of information for our policies. In the same vein, we are strengthening cyber resilience and fraud mitigation because, with digital finances, cyber risks are heightened. What we have done is to go beyond our setting in the Bank to work with other central banks.
So, are there collaborations among central banks in Africa or globally?
Yes, we have the Southern African Development Community (SADC)Committee of Central Governors (CCBG), but we also have continent-wide collaborations. It does not end there; we belong to other groupings where collaboration is important. There is no question that we have found it beneficial to collaborate. We do some things jointly. For example, in terms of bank supervision, we have a joint system that was developed by Mozambique, which we all use. We also have a regional payment system known as Real Time Gross Settlement (RTGS), which we use to facilitate trade using our local currencies. In our financial sector, we have resolved to expose all misdemeanours and indicted persons to strengthen the entire system. Under financial inclusion, we want to leverage technology to increase it from 73% to 90% or somewhere close to that. We realize that we can’t accomplish all these goals until we review our setting as an organization. So, we are simultaneously improving our operational efficiency and effectiveness. We must be able to deliver services in an efficient manner and as effectively as possible.
What are the achievements recorded so far?
It is too early in the day to talk about the achievements of the 2024-2027 Plan. However, we are completing some of the tasks that were previously unfinished. For example, one of the things we had to do was to establish a new stand-alone unit for anti-money laundering and financing of terrorism. We have also established a unit to look into the establishment of depositors’ insurance funds. By the end of the year, we should have established the fund. We have also made some organizational changes. In place of our Economics Department, we now have two departments: Research and Statistics. The Statistics Department will house the e-BOP and Export Tracking System that I mentioned earlier, as well as the data warehouse. We have hired consultants to assist us with that. We are also revamping the ICT Department to allow for more personnel in that area, as everything is now ICT-driven. We are working to improve our enterprise risk management. The supervision department is now also split into: Prudential Supervision, which looks at the banks and the deposit-taking non-bank financial institutions, and Financial Conduct Supervision, which deals with non-bank institutions, consumer protection, and AML/CFT issues. Everything I have stated so far indicates that we are focused on core central banking.
What do you mean by financial conduct?
Financial conduct relates to how banks and non-bank financial institutions under our regulatory ambit engage with their customers and the public. Financial service providers are required to exhibit integrity in their dealings with the public and ensure that they do not promote illicit financial practices within their institutions. They are also required to promptly and fairly deal with customer complaints in order to promote public confidence in the financial sector and enhance financial inclusion. The Bank has therefore set up dedicated units to prevent money laundering and financing of terrorism and strengthen the resolution of consumer complaints. This will ultimately complement our mandate to maintain financial stability.
Analysts say that Zambia’s financial inclusion policy will be crucial in bringing capital from the informal sector into the formal sector, where the multiplier effect can enhance its use. How would you rate the implementation of your reform initiatives to enhance financial inclusion, including the Small and Medium Scale Enterprises (SMES) guarantee scheme?
The focus of our financial inclusion is on small players. We have agency banking. With digitalization, some banks have closed their brick-and-mortar locations. They use technology for their operations, but they also have agents working for them who serve as their eyes, ears, and local outlets.
The Bank has a particular interest in promoting access to finance for Micro, Small and Medium Enterprises (MSME’s) because they currently contribute about 70% to the country’s GDP and 88% to employment. We are therefore working with the Ministry on Small and Medium Enterprise Development to develop a finance strategy to help these enterprises access reasonably priced finance and promote their growth.
We are also encouraging village banking. It is still informal, but the idea is to transition to a more formal setting. There are savings groups as well. However, we have also observed that some greedy people attempt to transform them into illicit pyramid schemes. As part of our public education and awareness campaigns, we sensitize the public to be on the lookout for such schemes. We recently show-cased this in conjunction with the banks at the Agricultural and Commercial Show in Lusaka. We are alive to the fact that the small players need to be brought in, and the fintechs are moving in very strongly. The idea behind fintech is that volume matters more than quantity. Using artificial intelligence, the fintechs are also building their own algorithms that allow them to give small loans intra-day, literally. In the morning, one receives money, and by afternoon or evening, they repay it. As they repay, their credit score improves.
Do you have a framework to integrate these fintechs and mobile money managers into your banking sector?
Yes, we’ve started, but it was quite tough at the beginning. The mobile networks wanted to participate, but we declined their requests because this is a regulated service. To be involved, they must set up a separate company. So, these mobile network providers that want to engage in payment system services and/or businesses have to establish separate companies that are subject to our regulation. They would then be designated as such. .It is important to stress that we oversee the financial services sector and not the technology side of things. In reality, the money they use for this purpose is linked to a bank. Banks are thus involved throughout the entire process.
What impact has mobile money made since you introduced it?
It is huge because mobile money has really taken off and we have recorded growth in digital payments. Digital payments were K52 billion in 2014; by last year, they had risen to K801 billion. It is extremely strong. Even in terms of our GDP, ICT and digital payments are among the key drivers. Mobile money payments did extremely well during the COVID pandemic era. This and ICT in general are two areas that unambiguously benefited from this very unfortunate development, and they in turn helped to save lives and livelihoods. Ever since, it has been extremely strong. As an example, politicians now use mobile money a lot instead of cash, as was previously the case, and have no trouble transmitting money to their agents in the field, even during elections. We have embarked on a “go cashless” campaign so that we use less cash, which is very expensive and too risky.
What are the investment opportunities for the global community in the Zambian financial system?
The Zambian financial system is open for foreign investments. In fact, we are currently attempting to implement open finance. We have no quota in terms of who wants to establish a financial institution in the country. The economy accommodates foreign banks that wish to open shop in Zambia. The taste of the pudding is in the eating. Credit growth is currently relatively low in our country. In the past quarter, we had about 85% in nominal terms. When we talk in real terms, we are talking about 15%, which is very low. It means that we do not have enough competition. Even though there are many banks in our country, they are not effectively competing. When we looked at the Kwacha loan-to-deposit ratio, we observed that it is actually less than 50%. We still have not reached the desired level of intermediation. Thus, we will examine their business plans and welcome any legitimate foreign banks that come in to raise these figures. The important thing is that our system allows for orderly entry and exit. We have a business-friendly environment. Banks in Zambia are still making profits, and there is still room for more. Our population is quite young. More debt restructuring plans are on the horizon. Mining, which is the beacon of foreign direct investment (FDI), is growing. Therefore, for the economy to flourish, more and different actors are needed, and this need goes beyond the commercial banking sector. Mortgage, merchant, and investment bankers are also invited. We also want venture capitalists to come in. Simply put, we are open for investments.
What is the outlook for the Zambian financial sector in the next five years?
The vision of the Zambian government is for us to attain the status of a prosperous middle-income country by 2030. That is the trajectory we have embarked on. We are pushing for the financial sector to take the lead in driving it. In the next five years, we want the banking sector to be even more vibrant.
Finally, how would you describe the quality of Zambia’s candidate for the 2025 presidential election of the African Development Bank (AfDB)?
In one word—superb! He is the right man to lead the AfDB at this pivotal moment because he is committed to ensuring that the Bank can deliver a more ambitious development agenda and drive Africa to the forefront of the global economy. He has a lot of experience in multilateral institutions. In addition to his managerial acumen, he is a skilled resource mobilizer. He has worked at some of the highest echelons of the World Bank. He is currently the World Bank’s Vice President for Budget, Performance Review, and Strategic Planning. Prior to attaining this position, he served the Bank as Chief Financial Officer and Chief of Staff to two former presidents. Therefore, he has garnered the requisite experience at the global level. By the way, our candidate, Dr. Samuel Maimbo, is a world-class artist. As an artist, he is very meticulous and perceptive. You know, artists see things before others notice them. I believe strongly that it will be a great opportunity for the continent to have this vibrant, energetic, and relatively young development expert with excellent interpersonal skills to serve as the AfDB President.